September 29, 2006 — 12963649.1

SJSU / TEIHigh Technology Tax

Institute

November 7, 2006Palo Alto, CA

Danni DunnErnst & Young,

LLP

Ivan Humphreys

Wilson Sonsini Goodrich &

Rosati

Jeffrey ShoreIntel

Corporation

Current Developments in Mergers

and Acquisitions

September 29, 2006 — 22963649.1

LLC Mergers

September 29, 2006 — 32963649.1

Tax-Free LLC “A” Reorganizations

Treas. Reg. Section 1.368-2 allows the merger of a corporation into a disregarded entity to qualify as a tax free “A” reorganization provided certain conditions are met.

However, the merger of a disregarded entity into a corporation cannot qualify as an A reorganization.

September 29, 2006 — 42963649.1

Tax-Free LLC “A” Reorganizations

The regulations establish three new definitions for purposes of determining whether a disregarded entity merger qualifies as a valid A reorganization.

A disregarded entity is defined as a business entity that is disregarded as an entity separate from its owner for Federal tax purposes, such as a domestic single member limited liability company that does not elect to be classified as a corporation. Other disregarded entities include a corporation that is a qualified REIT subsidiary within the meaning of Section 856(i)(2) and a corporation that is a qualified subchapter S subsidiary within the meaning of Section 1361(b)(3)(B).

A "combining entity" is defined as a business entity that is a corporation that is not a disregarded entity.

A "combining unit" is comprised solely of a combining entity and all disregarded entities, if any, the assets of which are treated as owned by such combining entity.

September 29, 2006 — 52963649.1

Tax-Free LLC “A” Reorganizations

Under the regulations, a valid A reorganization requires that "All of the assets (other than those distributed in the transaction) and liabilities (except to the extent satisfied or discharged in the transaction)" of each member of one of more combining units (each a transferor unit) become the assets and liabilities of one or more members of one other combining unit ... and ... [t]he combining entity of each transferor unit ceases its separate legal existence for all purposes ... ." Every merger will involve at least two combining units, the 'transferor unit and the transferee unit.

With respect to a disregarded entity merger, all of the assets and all of liabilities of T, a corporation, (and any of its disregarded entities) generally must become the assets and liabilities of a disregarded entity of P, a corporation, by operation of a merger law.

Since a combining unit must include a combining entity that is a corporation, T cannot merge into a disregarded entity owned by a partnership.

T's shareholders must not receive any interest in the surviving disregarded entity or such entity.

September 29, 2006 — 62963649.1

Type A Statutory MergerDisregarded Entities

T’s assets and liabilities are acquired by LLC in the merger in exchange for P stock

T ceases to exist Qualifies as a Type A reorganization

P

T

Merge

P stock

Pstock

Tstock

T S/H

100%P

stock

LLC

September 29, 2006 — 72963649.1

Type A Statutory MergerDisregarded Entities (cont’d)

T’s assets and liabilities are acquired by LLC in exchange for P/S interests T ceases to exist Does not qualify as a Type A reorganization Considered a taxable sale of T’s assets and liquidation of T under Rev. Rul. 69-6

T

Merge

P/S Interests

P/S Interests

Tstock

T S/H

100%P/SInterests

LLC

P/S

September 29, 2006 — 82963649.1

Type A Statutory MergerDisregarded Entities (cont’d)

LLC’s assets and liabilities are acquired by P in exchange for P stock LLC ceases to exist T retains its assets and remains in existence Does not qualify as a Type A reorganization

T

Merge

P stock

PStock

LLCInterest

LLCP

September 29, 2006 — 92963649.1

Type A Statutory MergerDisregarded Entities (cont’d)

P acquires all the stock of T for 50% A voting stock, 50% cash

T converts to LLC (disregarded for tax purposes)

Does not qualify as Type A reorg because T’s legal existence does not cease with conversion, as required by the 2003 temporary regs (TD 9242)

P

T

P

T

September 29, 2006 — 102963649.1

Expanded Reorganization Rules

September 29, 2006 — 112963649.1

Expansion of Merger Definition in Foreign Context

Section 368(a)(1)(A) provides that the term “reorganization” means “(A) a statutory merger or consolidation.”

Prior regulations interpreted Section 368(a)(1)(A) as a “statutory merger or consolidation…effected pursuant to the laws of the United States or a State or the District of Columbia” in which, as a result of the operation of such laws: All of the assets and liabilities become the assets and liabilities of the

transferee, and The combining entity ceases its separate legal existence.

The current regulations (adopted January 23, 2006) do not contain a reference to federal, state or District of Columbia law. The new reference is to “the statute or statutes necessary to effect the

merger or consolidation.” The change is particularly significant because the requirements of

Section 368(a)(1)(A) are the most relaxed of the reorganization categories, i.e., only need meet continuity of interest and continuity of business enterprise tests.

September 29, 2006 — 122963649.1

Application to Amalgamations

Facts: Country Q entities Z and V “amalgamate” in which pursuant to the Country Q statutes, all of the assets and liabilities of Z and V become the assets and liabilities of R an entity created in the transaction. Z and V shareholders receive stock of Y, the parent entity of R.

Analysis: With respect to each of Z and V, the transaction meets the requirements of Treas. Reg. § 1.368-2(b)(1)(ii), and is therefore a statutory merger or consolidation qualifying in this case as a reorganization under Section 368(a)(1)(A) by reason of Section 368(a)(2)(D), i.e., a forward triangular merger.

September 29, 2006 — 132963649.1

Some Implications of Expanded Definition

The expanded definition may make it easier to qualify foreign acquisitions, both unrelated party transactions and internal restructurings, and reorganizations. Each transaction under foreign law must be carefully analyzed to determine

its potential for qualifying under the A rules. The government has asked for comments as to whether a stock acquisition

followed by a conversion should qualify as an A reorganization. Although generally positive for U.S. stockholders of acquired

foreign entities, the new rules present potential traps for the unwary acquirer. Often U.S. acquirors in unrelated party acquisitions seek taxable status to

achieve favorable U.S. tax results. The primary planning technique involves a Section 338 election following a

taxable stock purchase, sometimes with a “check the box” election for the target and sometimes with a restructuring under foreign law.

The step transaction analysis of Rev. Rul. 2001-46 and its predecessor Rev. Rul. 67-274, further complicates this analysis, since post-acquisition restructuring may often result in reorganization status.

September 29, 2006 — 142963649.1

Continuity of Interest Update

Measuring Value of Consideration

September 29, 2006 — 152963649.1

Continuity of Interest UpdateMeasuring Value of Consideration

General Rule: COI tested based on aggregate consideration actually paid/received (subject to “Max Min” exception), but under circumstances defined in new regulations, value of consideration is measured as of signing, rather than as of closing (“signing date rule”) – Principle: where binding contract provides for fixed

consideration in the form of acquirer shares, target shareholders are generally subject to the “economic fortunes” of the acquirer as of signing

40% Threshold: Whether or not the signing date rule applies, the COI requirement is satisfied where 40% of the target shares are exchanged for acquirer shares

September 29, 2006 — 162963649.1

Continuity of Interest Update Measuring Value of Consideration

General Signing Date Rule – Consideration valued on last business day before the first date a contract is a “binding contract,” if the contract provides for “fixed consideration”

Binding Contract Tender offers made without binding contracts – date that amount and type

of consideration is first announced (or date of last announced modification) is treated as binding contract date

Pre-closing binding contract modification – Resets the value date if the modification relates to the amount or type of consideration

EXCEPT if modification results only in issuance of additional acquirer shares to target shareholders and, absent the modification, continuity of interest would have been preserved

NOTE: No exception if modification results in a change to non-share consideration, even if ratio of acquirer shares to non-share consideration (in original contract) increases

September 29, 2006 — 172963649.1

Continuity of Interest Update Measuring Value of Consideration

Fixed Consideration – General Rules Fixed number of acquirer shares + fixed amount of cash or

other property for all target shares or for each target share; or Provided that a proration mechanism preserves the fixed acquirer stock

and cash pools, shareholders may elect cash or stock Fixed percentage of (i) the number or value of target shares, or

(ii) each target share, to be exchanged for acquirer shares (provided that the exchanges for stock and cash are “economically reasonable”)

Provided that a proration mechanism preserves the fixed percentage of target shares (or each target share) to be exchanged for acquirer shares, shareholders may elect cash or stock and certain symmetric collars may be used for price protection

Accommodates flexibility given to target to issue more shares pre-closing (e.g., exercise of stock options)

September 29, 2006 — 182963649.1

Continuity of Interest Update Measuring Value of Consideration

Shareholder elections that could affect (i) pools of acquirer stock/cash or (ii) percentage of target shares to be exchanged for acquirer stock If binding contract does not provide fixed consideration, as specifically

defined in the General Rules, and target shareholders can elect stock or cash, fixed consideration will exist if contract provides –

Minimum number of acquirer shares and maximum amount of cash to be exchanged for all target shares, or

Minimum percentage of the number or value of target shares to be exchanged for acquirer shares (provided that the exchanges for stock and cash are “economically reasonable”)

Max Min Exception - Continuity of interest tested without regard to actual consideration received

Assuming minimum number of acquirer shares and maximum amount of cash are exchanged for all target shares, or

Assuming minimum percentage of target shares (by number or by value) are exchanged for acquirer stock

September 29, 2006 — 192963649.1

Continuity of Interest Update Measuring Value of Consideration

Contingent Consideration will prevent a contract from being treated as providing fixed consideration (e.g., a collar, cash top-up arrangement) Except if contingent consideration consists solely of acquirer shares and COI

requirements would be satisfied if the contingent shares were never delivered Escrow – Consideration placed in escrow to secure target’s performance of pre-

closing covenants or reps/warranties will not prevent a contract from providing for fixed consideration, but to the extent escrowed consideration is ultimately forfeited, it will not be taken into account in testing for COI (purchase price adjustment)

Anti-Dilution – Customary anti-dilution clause will not preclude fixed consideration; however, in the absence of such a clause, no fixed consideration will exist if the acquirer alters its capital structure in a manner that materially alters the deal economics

Dissenters’ rights – Will not preclude contract from being treated as fixed consideration, but any consideration paid to dissenters could be taken into account in testing for COI

New Issuances – If fixed consideration exists, new acquirer shares, securities or debt to be issued in the reorganization are valued as if issued at date of signing

September 29, 2006 — 202963649.1

Transaction Costs and the Final Regulations under

263(a)

September 29, 2006 — 212963649.1

Scope of Treas. Reg. §1.263(a)-5

Amounts paid to facilitate: The acquisition of a trade or business A change in the capital structure of a business entity Certain other transactions

Distinction between listed transactions and covered transactions

September 29, 2006 — 222963649.1

Listed Transactions – Treas. Reg. §1.263(a)-5(a)

Acquisition of assets that constitute a trade or business

Acquisition of an ownership interest in a business entity if taxpayer and business entity are related following the acquisition

Acquisition of an ownership interest in the taxpayer

Reorganization of the capital structure

A transfer described in §351 or §721

A formation or organization of a disregarded entity

An acquisition of capital A stock issuance A borrowing Writing an option

September 29, 2006 — 232963649.1

Facilitate Standard for Listed Transactions – Treas. Reg. §1.263(a)-5(b)

“Amounts paid in the process of investigating or otherwise pursuing the transaction” Based on facts and circumstances The fact that an amount would (or would not) have been paid

“but for” is relevant but not determinative

Special rules for borrowing, asset sales, mandatory stock distributions, bankruptcy, stock issuance, integration, registrar/transfer agent, termination payments

September 29, 2006 — 242963649.1

Covered Transactions – Treas. Reg. §1.263(a)-5(e)

Taxable acquisition of assets that constitute a trade or business

Taxable acquisition of an ownership interest in a business entity if, immediately after the acquisition, parties are related

Reorganization described in §368(a)(1)(A), (B), or (C), or a reorganization described in §368(a)(1)(D) in which stock or securities of the corporation to which the assets are transferred are distributed in a transaction that qualifies under §354 or §356

September 29, 2006 — 252963649.1

Facilitate Standard for Covered Transactions – Treas. Reg. §1.263(a)-5(e)

Amounts are facilitative (paid in the process of investigating or otherwise pursuing the transaction) only if: Amount is “inherently facilitative,” or Amount relates to activities performed on or after the “bright

line” date

September 29, 2006 — 262963649.1

Inherently Facilitative – Treas. Reg. §1.263(a)-5(e)(2)

All inclusive list Certain activities require capitalization, regardless of

when incurred, including: Fairness opinion Structure of transaction Merger agreement Regulatory approval Shareholder approval Conveying property

September 29, 2006 — 272963649.1

Bright-Line Date – Treas. Reg. §1.263(a)-5(e)(1)

The date on which a letter of intent, exclusivity agreement, or similar written communication (other than a confidentiality agreement) is executed by representatives of the acquirer and target; or

The date on which the material terms of the transaction (as tentatively agreed to by representatives of the acquirer and the target) are authorized by the taxpayer’s board of directors

September 29, 2006 — 282963649.1

Simplifying Conventions – Treas. Reg. §1.263(a)-5(d)

Capital transaction costs do not include: Employee compensation including salary, bonus and

commissions Fixed overhead (rent, utilities, depreciation) De minimis costs (less than $5,000)

September 29, 2006 — 292963649.1

Transaction Costs – Special Rules

Rebuttable presumption that success-based fees are facilitative A success-based fee is an amount paid to facilitate the

acquisition except to the extent that taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate.

Above exception requires contemporaneous documentation (prepared on or before the due date of the taxpayer’s return for the year in which the transaction closes).

September 29, 2006 — 302963649.1

Transaction Costs – Special Rules (Cont.)

Borrowing costs Amounts paid to facilitate a borrowing do not facilitate another

transaction. Thus, costs to finance a transaction are capitalized to the notes

and not the transaction.

Integration costs Does not facilitate the acquisition May be capitalized for other reasons

September 29, 2006 — 312963649.1

Transaction Costs – Special Rules (Cont.)

Asset sales Amounts paid to facilitate a sale of assets are not capitalized

but reduce the amount realized on the sale of assets

Break-up fees An amount paid to terminate a contract/arrangement is not

facilitative unless transactions are mutually exclusive

September 29, 2006 — 322963649.1

Accounting Method Changes for Treas. Reg. §1.263(a)-5

Change in method of accounting versus amended return No definitive IRS guidance or case law whether change

in treatment of transaction costs is a change in accounting method

September 29, 2006 — 332963649.1

Misc. Diligence Issues

September 29, 2006 — 342963649.1

Diligence Issues

Section 195 Transfer pricing Permanent establishment State income and sales tax nexus Section 409A discount options Historic Section 382 limitations

September 29, 2006 — 352963649.1

Developments Under theAnti-Inversion Rules

September 29, 2006 — 362963649.1

Background of Anti-Inversion Rules

Prior to 1994, the Code and Regulations were largely ineffective in deterring the inversion of U.S. corporations While outbound asset transfers were taxable, outbound stock transfers were

often not, and were becoming more common. Since 1994, inversions of U.S. corporations have been discouraged

under the Section 367(a) regulations, which require gain recognition on certain outbound stock transfers The existing Section 367(a) rules generally preserve tax-free status on

outbound transfers where an unrelated foreign acquiror is larger and has been engaged in an active trade or business outside of the U.S. for three years.

Congress, nevertheless became concerned about taxable inversions becoming widespread and depleting the U.S. corporate tax base.

The result was Section 7874, added by the 2004 Act, a statute that is designed to penalize the classic tax haven inversion, but by its terms can apply quite broadly.

September 29, 2006 — 372963649.1

Basics of Section 7874

Applies to Foreign Corporation Acquiring U.S. Corporation or Partnership where: After the transaction shareholders or partners in U.S. entity own 60% (or

80%) or more of a foreign corporation by reason of their ownership of the U.S. entity;

The foreign corporation directly or indirectly acquires substantially all the assets of the U.S. entity; and

The foreign corporation does not have a substantial presence in its country of incorporation.

Acquisitions of U.S. corporations by foreign corporations that do not result in the foreign corporation being treated as a domestic corporation under 80% test of Section 7874 must still run the gauntlet of the Section 367(a) regulations.

Notwithstanding Section 7874, interest in inversions remains high, in part because of the perceived burdens of being a public company in the U.S. (e.g., the effect of Sarbanes-Oxley).

September 29, 2006 — 382963649.1

Impact of Section 7874

Foreign corporations meeting the 80% threshold are treated as domestic corporations for U.S. tax purposes. Shareholders not taxable under Section 367(a) because no transfer to

foreign corporation. Considerable uncertainty over the impact of dual characterization, outside

of tax haven setting. Some companies wishing to list on non-U.S. stock exchanges have

considered inverting to low-tax jurisdictions and accepting domestic tax status.

Foreign corporations meeting the 60% threshold are treated as foreign corporations, but lose the ability to use tax attributes to offset income or gain from the transfer or license of property or to deduct certain compensation. Shareholders may also be liable for tax on gain recognized under Section

367(a) regulations.

September 29, 2006 — 392963649.1

Issues Under Section 7874

ISSUES Treatment of related party interests for purposes of the 60%

(and 80%) test What constitutes “substantial presence” in country of

incorporation? Calculation of 60% and 80% tests in context of

contemporaneous or related stock issuances Treatment of options Transactions involving foreign partnerships

September 29, 2006 — 402963649.1

December 2005 Regulations – RelatedParty Interests

In general, stock of the foreign acquirer held by one or members of the expanded affiliated group (“EAG”) is disregarded (i.e. not included in the numerator or denominator) for purposes of determining whether the 60% or 80% test is met. The effect of this rule is the prevent so-called “hook stock” (i.e., stock of

the foreign parent owned by a subsidiary) from affecting the application of the 60% or 80% tests.

Special rules allow for the inclusion of affiliate owned stock (other than hook stock) in the denominator, but not the numerator, if Either the common parent owns directly or indirectly at least 80% of the

domestic entity before the transition and continuing owners that are not members of the EAG hold no more than 20% of the acquiring foreign corporation, or

The former owners of the domestic entity do not own directly or indirectly more than 50% of any member of the EAG.

September 29, 2006 — 412963649.1

June 2006 Regulations - Definition of substantial presence

Regulation Section 1.7874-2T provides guidance on “substantial business activities” in foreign country of incorporation.

The temporary regulations provide a facts and circumstances test and a safe harbor test.

The facts and circumstances test compares business activity in the country of incorporation, taking into account only the “relevant factors,” to the total business activities of the EAG. The relevant factors are: Historical presence in the foreign country, Operational activities, indicated by property, services or sales, Substantial management activities, Substantial degree of ownership by investors resident in the foreign

country, and Strategic business activities in the foreign country.

Will the IRS issue private letter rulings under the facts and circumstances test?

September 29, 2006 — 422963649.1

Substantial Business Activity Safe Harbor

Under the safe harbor test of Treas. Reg. Section 1.7874-2T(d)(2), the EAG will have substantial business activities if all of the following tests are met: Employees based in the foreign country account for at least 10 percent (by

number and compensation) of total employees, The total sales of tangible assets in the foreign country is at least 10 percent

of the group’s total assets, and Sales within the country (over a prescribed 12-month period) account for at

least 10 percent of total group sales. Intangible assets are excluded from the asset test, in part because

of the uncertainty related to the location of such assets. A number of examples are provided under both the facts and

circumstances test and the safe harbor test and the guidance clearly suggests that inversions may still be possible under the right circumstances, most likely to a non-tax haven jurisdiction.

September 29, 2006 — 432963649.1

Other Aspects of June 2006 Regulations

Acquisition of stock of domestic corporation by a foreign corporation is an indirect acquisition of properties unless stock of domestic corporation already owned by foreign corporation Acquisition of interest in partnership holding stock of domestic corporation

is an indirect acquisition of a proportionate amount of the assets held by the domestic corporation

Acquisition of stock in domestic corporation by corporation “controlled” (more than 50%) by a foreign corporation is an indirect acquisition.

Stock in the acquiring foreign corporation “by reason of holding stock in the domestic corporation” will be determined on the basis of relative values, when, for example, the exchanging shareholders are also receiving stock in exchange for other property. This could include stock issued for cash or other property as part of a new

financing The preamble notes that this rule is subject to the application of Section

7874 (c)(4) which requires that transfers will be disregarded if they occur as part of a plan to avoid Section 7874

September 29, 2006 — 442963649.1

Other Aspects of June 2006 Regulations (cont’d)

Options and similar interests held by reason of holding stock in the domestic corporation or partnership are treated as exercised, if the effect is to treat the foreign entity as a surrogate foreign corporation

Where a surrogate foreign corporation is treated as a domestic corporation (other than from inception such as in the case of a newly-formed foreign corporation), the conversion is treated as an F reorganization, subject to all of the relevant provisions of the Code, including the Section 367(b) regulations.

Treatment of Publicly-Traded Foreign Partnerships (“PTPs”) Treated as foreign corporations for purposes of Sec. 7874 tests. If meet 80% test, foreign PTP is taxed as a domestic corporation. Comments requested on extending treatment to foreign non-PTPs. Impact of any regulations potentially far-reaching given extensive use of

foreign partnerships as investment vehicles